2023 TFSA Contribution Time: 2 Dividend Stocks to Buy with $6,500

Earn tax-free dividend income by investing in these top Canadian stocks via your TFSA.

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Investors seeking steady, tax-free income could consider investing in the shares of dividend-paying companies via the Tax-Free Savings Account (TFSA). Notably, dividends earned in a TFSA are not taxed, making it an excellent avenue to invest in stocks and earn tax-free passive income. 

So, if you plan to use the annual TFSA dollar limit for the year 2023 (which is $6,500), let’s explore two fundamentally strong dividend stocks that can be a solid addition to your portfolio. 

Enbridge

Enbridge (TSX:ENB) stands out among the top-quality dividend stocks on the TSX thanks to its impressive dividend payment history and ability to increase the same for decades. The company engages in oil and gas transportation and remains committed to enhancing shareholder value through consistent dividend payments in all market conditions. Moreover, its compelling yield adds to the positives and makes it an attractive income stock.

As stated above, this energy infrastructure company has a remarkable history of dividend growth. For instance, this Dividend Aristocrat has been distributing dividends for over 69 years. Impressively, it has uninterruptedly increased its dividend for 29 years. Further, its dividend has grown at an average annualized growth rate of 10%, the highest among its peers. 

What stands out is Enbridge not only maintains but also increases its annual dividend even during challenging times such as recession and the pandemic. This resilience in sustaining payouts during a period when many energy companies suspend or reduce their dividend underscores Enbridge’s dedication to returning value to its shareholders.

The strength of Enbridge’s dividend payouts is underpinned by its highly diversified income streams, a steady demand for its services, and a consistently high asset utilization rate. These factors contribute to the growth of its distributable cash flows (DCF) and provide a solid foundation for sustaining and increasing dividends. Additionally, benefits from regulated cost-of-service tolling arrangements, power-purchase agreements, and long-term contractual agreements drive its DCF, enabling the company to maintain and increase its payouts. 

Its multi-billion-dollar secured projects, ongoing investments in conventional and renewable energy assets, and utility-like growth projects will drive cash flows and payouts. It offers a high yield of 7.7% near the current levels, while its payout ratio is sustainable in the long term.

Toronto-Dominion Bank

From the energy sector, let’s shift focus to Canadian banking stocks. It’s crucial to note that top Canadian banks are renowned for their outstanding history of consistent dividend payouts. Among the prominent banks, one may consider investing in Toronto-Dominion Bank (TSX:TD) due to its remarkable dividend growth rate.

This financial services giant has been disbursing dividends for more than 167 years. Furthermore, its dividends have exhibited a compound annual growth rate of about 10% over the last 25 years, positioning it as a compelling choice to earn steady passive income. 

Its diversified revenue base, high-quality assets, and improving efficiency enable it to deliver strong earnings that support its payouts. 

Looking ahead, its growing loans and deposit base, strong credit quality, and strategic acquisitions will drive its earnings. Moreover, its target payout ratio of 40–50% is sustainable in the long term. The company offers a quarterly payout and a reliable yield of approximately 5%. 

Bottom Line

Enbridge and Toronto-Dominion Bank emerge as top stocks, consistently returning cash to their shareholders through increased dividend payments. Moreover, these companies have well-established businesses, diversified revenue streams, and continue to generate profitable growth. Furthermore, their sustainable payout ratios instill confidence, ensuring investors can depend on reliable dividend payouts.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Sneha Nahata has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.

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